US President Biden has threatened to impose heavy economic consequences if Putin invades Ukraine. Photo: AFP / Mikhail Metzel / Sputnik

With Russian troops mounting on Ukraine’s border threatening an invasion, speculation is rife over whether US President Joe Biden’s threatened new sanctions will be enough to deter Moscow’s aggression and change its calculus.

The Biden administration is reportedly weighing a sweeping raft of punitive measures that could cripple Russia’s access to bond markets, squeeze its top commercial banks, curb its ability to convert rubles to dollars, and possibly even cut its access to the international SWIFT banking transfer system.

Biden has said there would be “severe consequences” if Putin moves on Ukraine, “economic consequences like none he has ever seen.”

Russia saw tough times when the European Union imposed sanctions in 2014 and again in 2015 in punitive response to its invasion of Crimea.

But Russian bankers and lawyers say those measures ultimately caused Russia to decouple somewhat from the West, and vice versa, and that Moscow is now more self-reliant and resistant to Western pressure than previously.

That separation includes the financial sector, where local banks have supplanted foreign banks, not least HSBC and Barclays, and measures against money laundering have been tightened since EU sanctions were introduced.

While some of those measures have aimed to clamp down on ostracized local oligarchs, they’ve also gone a long way to insulate Russia from the power of Western capital and potential punitive measures.

“Sanctions have failed; they have failed to subdue Russia in any meaningful way,” said  Philip Gudgeon, director of Otkritie Bank, one of the country’s largest banks.

“It’s hard to know what exactly was expected to happen as a result of the sanctions, were they expecting Putin to change his policy and give back Crimea? This is not remotely in his character,” said Gudgeoun, who has many years of banking experience in Russia.

Analysts agree, to be sure, that Western sanctions have hurt Russia’s economy.

“Sanctions as well as counter-sanctions (introduced by the Russian government) are slowing down the economy and definitely having a macroeconomic effect,” said Vlad Kozlov of Ami Capital.

A Russian ruble with the spires of the Kremlin in the background. Photo: AFP

“Thus some of the major players in financial services such as EBRD [European Bank for Reconstruction and Development] and IMF [International Monetary Fund] left Russia [and] technologies and investment flows to the market reduced significantly,” he said.

But Russia’s many untapped economic resources, including its rich energy reserves, have attracted Asian investors and companies that have largely ignored the sanctions and scooped up lucrative assets and positions abandoned by fleeing Western ones.

“[By isolating Russia through sanctions], you are also giving way to Chinese, Japanese and South Koreans to come and take the place of Western capital,” said Alexei Roudiak, Herbert Smith Freehill’s partner in Moscow.

China, too, has made considerable inroads into the Russian market since 2014 and coincident with rising geopolitical cooperation with Beijing, analysts and observers note.

“Sanctions effectively forced Russia in on itself. Larger [local] financial institutions were able to mature and build their market share and consolidate the market in Russia,” said Gudgeon.

“Local banks have moved to take the business that Westerners might once have done. Sanctions have been interpreted by many as having given Russian business a degree of protectionism,” he said.

Russia’s shift towards more financial sector self-reliance has at the same time leveraged the capitalistic tools local businesses learned when the country was on a more decided globalization course and a more accepted member of the Western-led international community.

“People have this image that Russia has this antagonistic relationship to the West and is therefore doing everything its own way and it’s standing aside from global practices. That’s not the case. Russia has always had to adopt these practices and they have done it under their own banner,” said Gudgeon.

“Financial services especially have gone out of their way to have a regulatory landscape that is very similar to the West,” he added.

The Central Bank of Russia, widely seen as a tough and often unforgiving regulator, has been instrumental in keeping Russia both compliant with and insulated from international financial markets and potential sanctions. 

“The central bank is very strict and some of the parameters are used to manage a bank in the direction that the central bank wants. It may not help with business, but you have to do it anyway, because it is on the list of parameters. It helps to manage the system in the way that is suitable to the regulators,” said Andrei Litvinov, a former director of Life Financial Group.

Russian regulators have put Western credit card operators MasterCard and Visa on notice, requiring them to use the state-run National Payment Card System (NSPK) processing center to process all Russian transactions.

This gives the companies certain insulation if Biden forces Russia out of the SWIFT system, says Gudgeon. Russia’s market, he says, is among the world’s most lucrative for the Western credit card companies.

CBR’s president, Elvira Nabiullina, is a known Putin confidant and some say runs the bank as her private fiefdom.

Central Bank of Russia president Elvira Nabiullina in a file photo. Image: IMF

”If she doesn’t like you on a personal level, you are doomed. Some owners of banks invested in building a relationship with her and they survived. It is not just about hitting the parameters, it is about finding a common language and being loyal,” said one banker whose institution fell out with the CBR.

The CBR shows its muscle on a daily basis with compliance officers monitoring transactions in detail to guard against potential abuse by banks – charges that could give cause for even harsher Western sanctions.

“They regard themselves as an extension of the state to probe banks. There is a good deal of misuse and abuse of that authority. That comes from their cultural background,” Gudgeon said.

“They literally have an insight into every single transaction to identify counterparties using advanced automation. There is a very strong focus on identifying individual breaches and failures,” he said.

The central bank’s default position is not to trust the banks to report correctly using their own internally developed models, he said. A clampdown on small banks, many previously allied to certain oligarchs, demonstrated the CBR’s determination to clean up the market.

Russia previously had as many as 2,000 so-called “pocket” institutions until around seven years ago, or the time the West imposed its Crimea-related sanctions. The number has since consolidated dramatically to around ten large banks.

“The Russian Central Bank has cleaned up the playing field, revoking licenses and putting banks into bankruptcy, for violating all sorts of regulations. What has survived is a more efficient and more transparent, better run, and more compliant system,” said Alexei Roudiak, the Herbert Smith Freehills partner in Moscow.

“We used to have an enormous amount of phony rogue banks all over the place. The regulator has done a very good job,” he said.

“There is a red wall of banks, most of which are state-owned, that foreign consultants must approach and sell to. The market has become much more competitive,” said Gudgeon.

Poor compliance and outright abuse among smaller banks had badly damaged Russia’s reputation, seen in the 1990s Bank of New York $22 billion scandal and more recently the suspect outflow of some $200 billion worth of funds from Russian and other ex-Soviet nation banks through Danske Bank’s Estonia branch.

“The smaller banks were engaged in money laundering and escaping supervision by creating accounts in other jurisdictions,” said Litvinov.

A Russian soldier takes aim along the Ukrainian border. Photo: Facebook

While America’s and the wider West’s ability to cripple Russia financially through new sanctions is not in doubt, Moscow’s turn inward since 2014 means punitive measures will not bite as deeply as they would have previously.

But there are bigger questions about whether inflicting further damage to Russia’s economy is in Europe’s and by association the US’s interests considering the former’s rising dependence on Russian energy imports.

The Biden administration is likely to coax Europe to ratchet up its sanctions and may increase the severity of its own, but the punitive policy will have less impact than previously and as in 2014 may not be enough to change Putin’s stance on Ukraine.